A couple of key tips regarding interest rates:
- It's Not the Rate You Need to Know: When applying for a loan, never ask for just the "interest rate", but always ask for the APR. The APR is inclusive of fees and cost and is the ACTUAL cost for the loan on an annual percentage basis (if quoted accurately). The interest rate alone does not. Therefore, you may get quoted 5.00% interest, but after fees and costs have an APR of 5.50%.
- Check the APR: Once quoted an APR, always check it against a mortgage calculator (these are available free online at places like bankrate.com) to be sure it is accurate. All you need is the loan amount, payment and term to check. If the loan amount, payment and term you put in do not match the APR you were quoted, then you were misquoted and need to find out the truth.
- The Low Rate You See is Not Necessarily What You Get: Don't be fooled – the low rates you see advertised are for the very best qualified. This means 720 to 740 FICO or higher in today's market, with verifiable income, maximum 80% loan-to-value and low debt ratios. As your credit score drops and your equity usage or debt ratio increases, your rate most likely will too! Also, there are lots of additional "premiums" for things like cash out, condominiums and the like.
- Rate IS NOT the # 1 Consideration in Many Cases: As important as rates and APR's are, what's more important is what you get for the rates and APR. You can get a great rate and a bad loan or a competitive rate and a great loan. It comes down to looking at more than just the rate and payment, but also: the term, the tax costs, the fees paid, the purpose for the loan and the all-encompassing cost or benefit. In other words, if you got a greta rate, but extended your loan term, increased your taxes, paid unnecessary fees and did not capitalize on the best loan for your situation then it was not beneficial (this happens the majority of times in a rate and term refinance). But if you cut your payments, terms, taxes, reduce debt, save money up front, improve your financial position and negotiate fair fees, you have really done yourself a great service!
Let me leave you with this nugget of truth from Proverbs 24: 3 – "By wisdom a house is built, and through understanding it is established"